How valid is your online contract?

With the proliferation of broadband and mobile internet in India, it is becoming more and more lucrative to jump on the e-commerce bandwagon. By its very nature, e-commerce is a rebellion against distance. You can enter into an agreement for sale (of a mobile phone, for example) with a seller located a 1000 miles away at the click of a button.

What you are actually doing when you click on the button “Buy” is to enter into a binding contract with the seller to purchase the mobile phone from him. He is now duty bound to sell the phone to you. If he does not do so, you can get your money back and if you are so inclined, also get compensation from him for the loss and inconvenience. So the net result is that today, millions of electronic contracts are being signed by people across India, with sellers across India.

Our contribution today will look at the nature of an online contract. Specifically, it will look at three things:

a. Is it as “legal” as a written contract?

b. How do I enforce it?

Is it as “legal” as a written contract?

International Model Law

In the field of the internet, and particularly of online commerce, the model law made by the United National Commission on International Trade Law (UNCITRAL) is the most influential force.

In the Information Technology Bill of 1998, prepared by the UNCITRAL, it is mentioned that a contract made by the exchange of “data messages” is valid. Therefore, it can be easily presumed that a contract made online, i.e. by the exchange of data, will be valid as well.

But what about the Indian law

The Indian law is quite liberal when it comes to the legality of contracts. It states that even an oral contract is valid, except in some cases.

Also, as per the Indian Evidence Act, e-mail communication and other electronic communication is recognized as valid evidence in a Court of law.

Putting the two together, we can confidently conclude that Indian law does recognize online contracts as valid. After all, an online contract is nothing but communication between two parties resulting in a transfer of goods / services.

And if the communication is recognized as valid as evidence, then it follows that the contract that follows the communication is valid too.

How do I enforce this contract?

This is a much trickier question. Let us say you have a contract between you and a web development company to build your product. It is signed online. Now the Company does not deliver. Can you take the same action as you could if it was, say, a supplier of metal bars?

Absolutely. Even if the contract is not a brick and mortar contract, it can be enforced in the same way as any other contract.

You can either file a civil suit for damages (before the Civil Court / High Court in your city), or if the contract permits it, seek an arbitration. In every case, it is best to send a legal notice first and if the legal notice brings no results, then only take legal action.

Anything in particular that I should include in my online contract?

If it is not a standard form contract and you are preparing it, make sure you include a “liquidated damages” clause. This essentially means that you clearly state the compensation in advance.

Why?

In the brick and mortar world, calculating loss is much easier. In the digital world, however, it is next to impossible. What if the web development company does not build your website and you cannot even launch the product?

That product might have been the next facebook or it might have been a non-starter. You cannot go to Court and explain your business plan. So you make life easier by writing a clause that looks like this:

“If XYZ Company does not build a website matching the requirements set out in Annexure A by the 15th of January, 2011”, I shall be entitled to 100% of the website development fee as compensation.”

We recommend such a clause because it brings clarity to the relationship. Naturally, some give and take might be necessary before you sign on the dotted line or click the “I Accept” button. An online contract after all marks the beginning of a relationship.